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Weighing the market -September 2022

published: September 16th 2022
by: Wes Ishmael
source: Southern Livestock Standard

Supply fundamentals take hold


“It is becoming more apparent that the supply of calves is going to be very tight this fall,” says Kenny Burdine, Extension livestock marketing and management specialist at the University of Kentucky. “Given the continued reduction in the size of the beef cow herd, this was likely to be a smaller fall calf run had weather not been a challenge. But, when combining that with the drought implications, fundamentals are setting up for a seller's market for feeder calves.”


In a recent issue of Cattle Market Notes Weekly, Burdine also notes beef cow slaughter levels remain 14% higher year over year. It is significantly more in the Southern Plains and surrounding states.


David Anderson, Extension livestock economist with Texas A&M AgriLife Extension Service provided perspective in the early-September issue of In the Cattle Markets from the Livestock Marketing Information Center. He looked at federally inspected beef and dairy cow slaughter for region 6, which includes Texas, Oklahoma, Louisiana, Arkansas, and New Mexico. He also compared cow slaughter in the region this year to levels during the last major drought (2011-12) in Texas and parts of other states.


“Cow packing plants in region 6 have processed 668,000 beef cows this year, up 31% (or 157,000 head) from last year. They have processed 217,000 dairy cows this year, just slightly below last year,” Anderson explains. “The states in region 6 reported 8.4 million beef cows on January 1, 2022. Those states had 8.8 million beef cows on January 1, 2011. While cows may come into the region for slaughter, it’s likely that a larger proportion of the herd has been culled this year than in the last major drought.”


So far this year, Anderson says 8,000 more beef cows in region 6 have been slaughtered than in 2011; 164,900 head more than in 2012.


Recent rain and moderate temperatures across Texas could slow culling in the near term, according to Anderson.


“Watch national and regional beef cow culling over the next six weeks to better gauge the impact of these storms,” Anderson says. “Seasonally, the largest cow culling weeks of the year nationally occur in October and November. Rain and earlier heavy culling rates could pull back slaughter and boost prices.”


Supply snapshot


Nationally, the calculated number of calves outside feedyards Jan. 1 this year was 25.54 million head, which was 676,000 head fewer (-2.6%) than a year earlier, according to USDA’s Cattle report. Numbers outside feedlots July 1 of 35.7 million head were 1 million fewer (-2.7%) year over year.


The beef cow inventory at the beginning of the year was 718,500 head fewer (-2.3%) year over year at 30.12 million head. That was the smallest inventory since 2015 and represented the steepest year-over-year decline since 1996-97, according to Anderson. Beef cow numbers July 1 of 30.35 million head were 2.4% less year over year.

Beef heifers held for replacement of 5.611 million head Jan. 1 were 191,600 head fewer (-3.3%) than the previous year. The 4.15 million beef heifers retained as replacements July 1 were 150,000 fewer (-3.5%) than a year earlier.


“The July 1 inventory of heifers in feedlots was 2.9% more than last year and confirms that heifers continue to be diverted into feeder channels rather being retained for breeding,” explained Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, in early-August market comments. With the mid-year beef cow inventory 2.4% less year over year and the inventory of beef replacement heifers down 3.5%, Peel said the beef industry was poised to see the largest single-year beef cow herd liquidation in more than 35 years.


The August Word Agricultural Supply and Demand Estimates pegged beef production for this year at 27.99 billion lbs., which was 68 million lbs. more than the previous month's estimate, based on higher expected placements in the second half of this year. Estimated beef production next year of 26.26 billion lbs. would be 1.7 billion lbs. less (-6.2%) than this year and significantly less than the record and near-record supply the last three years.


Multi-year price strength


So, the die is cast for increasing cattle prices as cattle numbers and beef production decline.


USDA's Economic Research Service (ERS) increased projected feeder steer prices (750-800 lbs., Oklahoma City) in August’s Livestock, Dairy and Poultry Outlook. That was based on recent price strength and anticipated firm feedlot demand in second half of this year.

The feeder steer price was forecast $3 higher in the third quarter at $171/cwt. and $2 higher in the fourth quarter at $173 for an annual average of $164.60. Prices were forecast at $169 and $186 in the first and second quarters of next year, respectively, with an annual average of $199.25.


More broadly, the recent Baseline Update for U.S. Agricultural Markets from the Food and Agricultural Policy Institute (FAPRI) at the University of Missouri offers added perspective regarding potential cattle numbers and prices over the next five years.


FAPRI pegs the beef cow inventory at 29.3 million Jan. 1 of next year, which would be 800,000 fewer (-2.7%) year over year. FAPRI projects the inventory at 28.7 million head in 2024 and then 28.5 million head the next two years before rising to 28.7 million in 2027.


Forecast cattle prices increase during most of the next five years — all higher than this year.

FAPRI forecasts the weighted average five-area direct fed steer price this year at $142.35/cwt. For 2023 through 2027, projected prices are, respectively, $150.98, $156.53, $158.87, $159.39 and $157.81.


FAPRI estimates this year's average price for feeder steers (600-650 pounds, Oklahoma City) to be $180.54. For 2023 through 2027, projected prices are, respectively, $197.54, $211.62, $219.03, $220.45 and $218.22.


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